1. Suppose a person earning £100 gets and additional £100 in benefits. Their marginal tax rate is 25 per cent and for each extra £10 of take-home pay a person loses benefits of £6. What will be the change in their income after taxes if the go from making £100 to £200 in take-home pay?
(Hints: What will their income after taxes and benefits be if the earn £100 in take-home pay? What will their income after taxes and benefits be if the earn £200 in take-home pay?
2. When means-tested benefits are combined with a progressive tax system there can be a serious problem with disincentives. A situation known as the ________. This is due to the loss of tax benefits and loss of in-kind benefits when income increases."